"Cap-and-Trade" Caps California's Climate Change Regulations

Posted on October 24, 2011 by Barbara E. Lichman, Ph.D., J.D.

On October 20, 2011, the California Air Resources Board (“CARB”) adopted a new set of rules, called “cap-and-trade,” implementing the requirements of AB32, California’s groundbreaking climate change law. Enacted in 2006, AB32 requires reduction in carbon emissions, usually credited as the cause of “global warming,” to 1990 levels by the year 2020. The new cap-and-trade regulations will be implemented in phases, with the State’s largest emitters required to meet the caps beginning in 2013; and remaining emitters, collectively about 85%, required to begin compliance in 2015.

Essentially, the cap-and-trade program began with the establishment of maximum emissions benchmarks or “caps” for each category of major emitting industry sector, derived from a three year study of emissions data from the largest industry sectors. Businesses will be allowed to emit up to 90% of those benchmarks (“Carbon Allowance”) in the first year. If a company operates efficiently, and below the “cap,” it may sell its excess as a Carbon Allowance on the market to industries unable to reduce their own carbon emissions.

While it sounds relatively simple, there will be additional government regulations involved, as well as private businesses who will benefit from the new system. While CARB will operate the market, it will have to retain auction hosts and monitors to operate the system which could handle as much as $10 billion in Carbon Allowances by the year 2016.

Moreover, there are perceived to be significant downsides to the system. Emitting industries are not overly enthusiastic, because of the increased regulation and higher emissions standards in the form of caps, which may make it more expensive for them to operate in California. According to the Legislative Analyst’s Office independent review, some industries will likely leave the State, and jobs be lost, as a result of the new “cap-and-trade” program.

Environmentalists are not wild about the system either, because they believe it does not reduce emissions, but merely transfers the right to emit. What is certain is that California is once more in the forefront of environmental regulation, for good or ill, in the nationwide effort to limit emissions of greenhouse gases.
 
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What Does EPA's Finding that Greenhouse Gas Emissions Endanger Public Health and the Environment Mean to Business?

Posted on December 14, 2009 by Chevalier, Allen & Lichman, LLP

When the U.S. Environmental Protection Agency issued its final finding that emission of six greenhouse gases endangered the public’s health and the environment because of their effect on climate change, the business community wondered how it should respond to the news.  At first glance, there seems to be blinding maze of legal and policy issues that will affect business decisions.  Although far from clear, there is a way out of the maze – although businesses with significant greenhouse gas emissions should be prepared to tackle the important issues that the Endangerment Finding raises.

Businesses Need to Take a Deep Breath (Irony Intended)

The road to the endangerment finding began in 2007, when the U.S. Supreme Court decided in Massachusetts v. EPA that carbon dioxide and other greenhouse gases constituted “air pollutants” under the Clean Air Act.  To most savvy businessmen this was a clear signal to start planning how their businesses would cope with the establishment of limits on emission of greenhouse gases.  Although the Bush Administration EPA successfully sat on the issue, when the Obama Administration took office, most companies recognized that an endangerment finding would top the EPA’s list of major environmental actions.  Thus, EPA’s announcement this past April of its proposed finding and its announcement of the final endangerment finding should have come as no surprise to anyone who has been monitoring this issue.

The key thing for businesses to remember is that the endangerment finding by itself does not regulate the emission of greenhouse gases from any source, large or small.  That being said, it does have a direct impact on mobile sources (because of section 202(a) of the Clean Air Act), with the EPA planning on issuing its final “light-duty vehicle” greenhouse gas emissions rule some time in Spring 2010.

When the light-duty vehicle rule is finalized, the GHGs subject to regulation under that rule (i.e., the six greenhouse gases identified in the Endangerment Finding) would become immediately subject to regulation under the PSD program, meaning that from that point forward, prior to constructing any new major source or major modifications that would increase GHGs, a source owner would need to apply for, and a permitting authority would need to issue, a permit under the PSD program that addresses these increases. Similarly, for the Title V operating permit program, it would mean that any new or existing source exceeding the major source applicability level for those regulated GHGs, if it did not have a title V permit already, would have 1 year to submit a title V permit application.

Recognizing this incidental effect, the EPA proposed a “tailoring rule” on September 30, 2009.  In the Tailoring Rule, EPA proposed to set a new threshold of 25,000 metric tons of GHG emissions to define when Clean Air Act permits under the New Source Review and Title V operating permits programs would be required.  The proposed thresholds would “tailor” these permit programs to limit which facilities would be required to obtain permits and would cover nearly 70 percent of the nation’s largest stationary source GHG emitters—including power plants, refineries, and cement production facilities, while shielding small businesses and farms from permitting requirements. Thus, businesses that emit less than 25,000 metric tons of GHG and businesses that currently have a Title V operating permit will not, for the most part, be covered by the Tailoring Rule.

Should Businesses Make Voluntary Reductions in Greenhouse Gas Emissions?

So what should companies do in the meantime?

Many businesses have been evaluating their carbon footprint over the past few years (particularly since the Massachusetts v. EPA decision) and have been looking at ways to reduce GHG emissions. For many companies energy is a cost, and in some cases, greenhouse gases may be a lost resource.  By increasing efficiency, costs are reduced and the business operates better.  For example, the aviation industry loves to trumpet how it is getting “greener,” because it is reducing GHG emissions.  However, that greening has come about by reducing fuel consumption, which became a necessity when fuel prices spiked because fuel costs represent a huge percentage of the aviation industry’s costs.  The result?  Increased fuel efficiency=fewer emissions=reduction in emissions of GHG, with a reduction in fuel costs to top it off.  Moreover, there are ways that would reduce GHG emissions and accrue tax benefits, such as cogeneration or combined heating power.  These types of programs that reduce GHG emissions and accrue a direct benefit to the company’s bottom line should be pursued regardless of the regulatory environment.  The caveat would be that businesses should check in with their environmental law attorney to see if there are any carbon banks or carbon credit systems set up that they could participate in order to get “credit” for any reduction in GHG emissions.

Outside of those programs, however, caution should be taken with respect to taking on projects that would reduce GHG emissions, but represent a net cost to the business.  Many businesses are taking a “wait and see” attitude, relying on their environmental law attorneys to monitor developments, report to them about those developments and assist them in develop strategies and manage the risk.  It is only when the regulatory regime is in place that businesses can assess what changes need to be made to their processes and to their equipment in order to comply with the regulations.  Particularly when the costs to comply are substantial, businesses are going to want to wait until the requirements become fixed before they undertake a far-reaching GHG emission reduction program.

Congressional Outlook:  Who Knows What They Are Up To?

The progress in Congress on new Climate Change legislation is an additional reason for businesses to sit tight.  Since Monday’s Endangerment Finding, most business and industry groups have stated that they would much prefer either one of the bills currently being considered in Congress to regulation by the EPA.  The primary reason for this is the fact that both the Boxer-Kerry bill and the Waxman-Markey bill have “cap-and-trade” provisions, which, although excoriated by the Republicans, are much better for businesses than an EPA-centric “command-and-control” regulatory regime.  A good example of this change of heart is Sen. Mark Pryor (D.Ark.), who was reported as being more willing to consider a cap-and-trade proposal now that the EPA has issued its endangerment finding.

At the same time, the failure to come up with a bill for the President’s approval prior to the Copenhagen Climate Change Conference, the release of the hacked e-mails from East Anglia University’s Climate Research Unit, and the inexorable march of time have led to the Senate going back to the beginning.  Indeed, Sens. Kerry, Lieberman and Graham have put forth a new outline for Climate Change legislation. Thus, it is unlikely that Congress will have anything to offer until after the EPA has finalized the light-duty vehicle regulations, and perhaps after the Tailoring Rule is finalized.

Conclusion: Now Is The Time for Self-Assessment

The upshot of the Endangerment Finding and, for that matter, EPA’s regulation of GHG emissions, is that now would be a good time for businesses to assess just how much GHG emissions they produce.  The potential impact of EPA’s regulation of GHG emissions will be felt by companies that have not been traditionally required to examine their exposure to Clean Air Act regulation.  To state that there is not much clarity as which companies will be affected by the EPA’s Tailoring Rule, for example, is an understatement.  Even the EPA recognizes in its rule that it will need to fine tune it over the years so that does what it is supposed to do.  Thus, the more businesses know about their operations and the amount of GHG they emit, they better they will be able to assess their place in just about any scenario that may come up.
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Early Draft of Boxer-Kerry Climate Change Bill Released, Includes Aircraft Emission Provision, But Still Much Work to Be Done

Posted on September 29, 2009 by Chevalier, Allen & Lichman, LLP

Update 09/30/09 The Boxer-Kerry bill introduced at the press conference this morning - also known as Clean Energy Jobs and American Power Act - dropped the provision requiring the EPA Administrator to promulgate standards for aircraft and aircraft engines.  Instead, it includes a more general provision that

. . . the Administrator may establish provisions for averaging, banking, and trading of greenhouse gas emissions credits within or across classes or categories of motor vehicles and motor vehicle engines, nonroad vehicles and engines (including marine vessels), and aircraft and aircraft engines, to the extent the Administrator determines appropriate and considering the factors appropriate in setting standards under those sections.

In his article that appeared in the New York Times on September 28, 2009, Darren Samuelson stated that Sen. John Kerry (D-Mass) is attempting to move the discussion away from “cap-and-trade” and to focus on “pollution reduction:”

Kerry last week sought to change the vernacular surrounding the climate bill and sell its concepts more broadly, insisting it is not a "cap and trade" proposal but a "pollution reduction" bill. "I don't know what 'cap and trade' means. I don't think the average American does," Kerry said. "This is not a cap-and-trade bill, it's a pollution reduction bill"

The early discussion draft that was released on September 29, 2009, reveals that the “Boxer-Kerry” bill is similar to the HR 2454 (also known as “Waxman-Markey” or “American Climate and Energy Security Act”) which was passed by the House earlier this past summer, most notably, they both “contain the same longer-term emissions limits of 42 percent below 2005 levels by 2030 and an 83 percent cut for 2050.”   http://bit.ly/3TPuk   There are, however, a couple of notable differences.

  1. Boxer-Kerry “diverges from the House measure in its push for a 2020 emissions target of 20 percent, compared with the House's bill's 17 percent limit.” http://bit.ly/3TPuk
  2. In Subtitle D “Carbon Market Assurance,” oversight and assurance of carbon markets are given solely to the “Federal Commodities Trade Commission.”  § 431(b)(1). The working group established in § 431(c) will make its recommendations to the Commodity Futures Trading Commission (CFTC).
  3. There is a short Subtitle – “Nuclear and Advanced Technologies,” which covers “nuclear grants and programs,” but nothing else. Although the draft includes a section “Nuclear Waste Research and Development,” it is, for the time being, blank.  Subtitle D, “Nuclear and Advanced Technologies,” §§ 141 and 142.
  4. Boxer-Kerry includes a provision stating that the EPA Administrator shall promulgate greenhouse gas emission standards for aircraft and new aircraft engines. § 821(c).

The early draft also is different from the House Bill for what it does not contain, for example:

  1. Boxer-Kerry does not bar the EPA from considering greenhouse gas emissions from “international indirect land-use changes” when implementing the national biofuels mandate. http://bit.ly/3TPuk
  2. Unlike ACES, Boxer-Kerry does not contain a section that restricts the EPA’s ability to enact climate change regulations. http://bit.ly/3TPuk

Despite these differences, the bulk of the draft Senate bill contains many of the same provisions of ACES. Moreover, this is an early draft of the bill, the completed bill is expected to be released at a Wednesday, September 30, 2009, press conference. As Darren Samuelsohn stated in his New York Times article:

Already last week, several Democratic senators working outside of the Boxer-Kerry camp said their ideas would be melded into the legislation at a later date. "It's going to need a lot of work," said Sen. Sherrod Brown (D-Ohio).

Yes, indeed.

 

 

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Climate Change and Clean Energy Headline U.S. Senate Committee Hearing

Posted on August 7, 2009 by Chevalier, Allen & Lichman, LLP

John M. Broder, a columnist for the New York Times, writes that:

The changing global climate will pose profound strategic challenges to the United States in coming decades, raising the prospect of military intervention to deal with the effects of violent storms, drought, mass migration and pandemics, military and intelligence analysts say.

Such climate-induced crises could topple governments, feed terrorist movements or destabilize entire regions, say the analysts, experts at the Pentagon and intelligence agencies who for the first time are taking a serious look at the national security implications of climate change.

Against this backdrop, the U.S. Senate Committee on Environment and Public Works held hearing on Thursday, August 6, 2009, on the climate change bill currently under consideration by Senate after being passed by the House earlier this summer.  According to Chairman Barbara Boxer (D-Cal.),  "the hearing will focus "on ensuring that America leads the clean energy transformation as we address the threat posed by climate change.

The battlelines were drawn in the opening statements.  The Democrats emphasized the national security aspects of the failure of the United States to address climate change adequately.  Sen Lautenberg (D-N.J.) said in his opening remarks:

We have also heard from our military leaders that global warming is a serious threat to our national security.  As many as 800 million people are going to face water and cropland scarcity in the next 15 years, setting the stage for conflict and breeding the conditions for terrorism.

These sentiments were echoed by Sen. Cardin (D-Md.) who stated that addressing climate change was "important for national security."

The Republicans seemed to acknowledge the fact that movement on climate change is necessary, but that the energy policy of the United States should focus first and foremost on the economy.  This resulted in Sen. Bond (R-Mo.) calling for off-shore drilling for natural gas and oil, Sens. Voinovich (R-Ohio) and Alexander (R-Tenn.) calling for more nuclear energy, and all of them calling for "Clean Coal," describing the United States the "Saudia Arabia" of coal.  Nuclear energy, in particular because of its "no carbon emissions," is high on the Republican's agenda.

The basic issue between the two parties seems to be this:  the Republicans believe that the status quo should be protected, because the alternative proposed by the Democrats is too costly and uncertain.  The Democrats, on the other hand, believe that while the costs will be high in some sectors, other sectors will pick up the slack.  While Sen. Voinovich is correct that the economy must be protects, Sen. Whitehouse (D-R.I.) is also correct in stating that to

move the government's hands in a way that supports a better clean energy future is not a distrubance in the "state of nature" . . . it's actually making better decisions with the same power we use now.

Panel One:  Views From the Obama Administration

Putting aside for the moment the prepared testimony by the witnesses, the nuclear question was addressed through a question from Sen. Boxer to panel by stating "under the analysis of the House Bill, 161 new 1000 megawatt nuclear power plants would result from that bill."  The panelists confirmed that the cap-and-trade system sets up the market mechanisms that would allow the power and energy companies to move forward with the development of nuclear power plants in addition to solar and wind.

Sen. Inhofe attempted to move the discussion away from climate change and toward the issue of reliance on foreign oil.  His point was that we need to develop our oil reserves that we have here, presumably instead of developing solar, wind and nuclear resources.  Hon. Strickland, from the Interior Department, replied that the Interior Department is moving toward developing all of the natural resources of the United States in "responsible manner."  But that should not mean that we should not also develop "renewable" resources.

Panel Two:  Industry and Environmental Group Representatives

The second panel of the day concentrated a little more on reductions of carbon emissions.  Interestingly enough, Mr. Fehrman of the Mid-American Energy seemed to support a hard cap, without any trading of allowances.  His belief is that introducing market mechanisms only raise the costs for energy companies.  In addition, he believes that carbon capture and sequestration will be "commericially available" in 5 to 10 years. 

On the other hand, Mr. Krupp advocated in favor of cap-and-trade to achieve real emission reductions in the nation.  Mr. Krupp also noted that "carbon capture is ready to roll" - in Norway.  The reason why?  Because there is a price on carbon and the rechonology was developed as a result.

Shortly after the hearing was over, the Senate recessed for the rest of the month of August, leaving the big questions regarding climate change until the Fall.

The witness list and a link to the video webcast of the hearing after the jump.

Witness List

Majority Statements
Barbara Boxer

Witnesses

Panel 1

The Honorable Jon Wellinghoff
Chairman
Federal Energy Regulatory Commission

The Honorable David B. Sandalow
Assistant Secretary for Policy and International Affairs
United States Department of Energy

The Honorable Tom Strickland
Assistant Secretary for Fish, Wildlife, and Parks
United States Department of the Interior

Panel 2

Fred Krupp
President
Environmental Defense Fund

Bill Fehrman
President and CEO
MidAmerican Energy Company

View Archived Video Webcast of Hearing
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Day Three of Waxman-Markey Bill Hearings: No Headliners, Just Lots of Talk

Posted on April 23, 2009 by Chevalier, Allen & Lichman, LLP

On Day Three of the Waxman-Markey Bill (also known as the American Clean Energy and Security Act) hearings, perhaps the best place to begin is with Rep. Edward Markey's (D-Mass) closing remarks, where he asked the panelists "do you think we can construct a cap-and-trade system?"  All of the panelists replied in the affirmative.  This session, without the Administration headliners of yesterday and the Pop culture icons that are scheduled for tomorrow (Al Gore and Newt Gingrich), was noticeably less on point and more meandering.  There were, however, several central themes:  cap-and-trade, Carbon Capture and Storage, and renewable energy.

Cap-and-trade

Although this topic was discussed extensively yesterday, the first panel consisted of representatives of various utility groups and consumer groups.  The electric utilities all seemed to want the same thing:  free allowances instead of having to pay for them at auctions.  They claim that this will allow the utilities to keep their prices down.  There is no surprise there.  The only interesting quote from a Congressman came, once from Rep. Joe Barton (R. Texas), who told the witnesses that "hybrid cars never pay off and American won't drive them unless forced by the government, backed by the Army."  How dead was it in the Committee room?  One report indicated that "the Chairman is reading a paper and only about 3 Reps are paying attention to these guys begging for handouts."

Carbon Capture and Storage/Clean Coal

During the hearings there has been talk about "Carbon Capture and Storage."  Carbon capture and storage (CCS) is an approach to mitigating the contribution of fossil fuel emissions to global warming, based on capturing carbon dioxide (CO2) from large point sources such as fossil fuel power plants and storing it away from the atmosphere.  The utilities and the coal industry believe that CCS is the way to go because it will allow them to go on using coal without producing CO2.  However, the technology is not there yet, and there is a fear that the development of CCS would draw needed dollars away from the development of other sources of energy.  Interestingly, David Hawkins of the Natural Resources Defense Council stated that CCS can happen if it has adequate policy support.

Renewable Energy

On the other hand you have the advocates for "renewable energy."  Although most people think of solar and wind power when they think of renewable energy, there are other sources.  Geothermal energy is one such source.  Dan Reicher of Google (yes, that Google) testified that "engineered geothermal energy potential in Texas could provide 100% of Texas' electricity needs."  Supporters of renewable energy also came from unlikely sources, Jim Robo, President and COO of Florida Power & Light told the Committee that "we've barely begun to tap renewable energy . . . Unchecked climate change will cost us tens of billions of dollars."  This thinking leads to the Waxman-Markey Bill's call for a goal to be set that a certain percentage of energy be from renewable sources.  This has also led to various Representatives to call for the definition of renewable energy to include nuclear energy, biomass, and "clean coal."

In the end, there was a chorus among the last panel, calling for a strong legislation to deal with climate change and energy.   One can hope that the last day of the hearings, with some heavy hitters taking the witness chair, the questioning will be a little more interesting.

Click on "continue reading" for a complete Witness List with links to the witnesses written testimony and links to the video of the Hearing.

Witness List

Panel 1: Allocation Policies to Assist Consumers

Panel 2: Ensuring U.S. Competitiveness and International Participation

Panel 3: Low Carbon Electricity, Carbon Capture and Storage, Renewables, and Grid Modernization
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